Paradigm Drift - InformationWeek

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03:44 PM

Paradigm Drift

CIOs aren't taking many chances on startup technology. So is innovation dead?

Ken Bohlen thinks a lot differently about emerging technology today than he did two years ago.

Back then, the executive VP and chief innovation officer at multinational manufacturer Textron Inc. sat on venture-capital advisory boards in order to sniff out the hottest ideas emerging from technology startups. More than half of his speaking engagements were with private-equity investors or investment analysts looking for clues about the next big thing. Best of all, his employer encouraged such pursuits.

The $12 billion Providence, R.I., company was so keen on getting close to emerging technologies that in January 2000 it invested $100 million in Safeguard Scientifics Inc., a holding company of young software and consulting businesses. The investment was part of a broader effort to make sure Textron, a diverse manufacturer heavy in the aerospace and automotive industries, didn't miss out on technologies that could transform its industries. "A year and a half ago, anyone who threw caution out there was dubbed an old fogy," he says.

Bohlen loved the rush of working with Safeguard's startups, helping entrepreneurs with exciting ideas gain perspective on what potential business customers really needed. But in the end, the investment in Safeguard, which is now trading at less than $2 a share, and other E-businesses tanked, forcing the company to write off about $117 million. These days, Bohlen's priorities have changed along with Textron's. He's focused on a few big projects that emerged from the period of intense innovation, and he doesn't have room for a lot of new ones. So what happens if a startup calls to talk about new technology? "I'd be hard-pressed to spend time with them," he says. "It's not that they wouldn't have a groovy technology. But right now, I'm just trying to implement what made sense a year and a half ago. I don't need new tools."

The slumping economy has created a world of Ken Bohlens. Call them focused or cautious or snake-bit, but these days, business-technology executives are much less likely to seek out new technology. Although the earnings reports of companies such as Cisco Systems, IBM, and Sun Microsystems show that the entire IT industry is hurting, what has changed most dramatically is the innovation cycle for startups and the technologies they're developing. To put it bluntly, while the pace of business is as intense as ever, the pace of new-product innovation has slowed.

But it isn't dead. People such as Bohlen, who shape the IT budgets of the world's largest businesses, are finding more efficient ways to keep their eyes on emerging trends. Executives at a few companies, especially those in industries known for early adoption like biotechnology, continue to gamble on new ideas. And the true-believer entrepreneurs continue to drum up new products, even though they're working with much less investment money and much more skeptical buyers (see sidebar story, "Develop With The Customer In Mind").

Bohlen's top goal is implementing a $20 million supply-chain management initiative that began during the economic boom. Though he isn't in the market for new software, he keeps his eyes open for new ideas. He's continued Textron's relationships with two Safeguard startups, including wireless-applications maker ThinAirApps Inc. He also keeps abreast of emerging technologies through more conventional channels by attending conferences, reading think-tank and analyst reports, and maintaining relationships with established vendors such as AT&T and IBM. "In the spirit of innovation, I've got to keep that void filled so I don't fall behind," he says.

But for IT entrepreneurs, a continued interest in emerging technologies doesn't pay the bills. A risk-averse climate creates little incentive for buyers to stick their necks out on unproven companies, so it's a particularly bruising time to be a startup selling niche software or services. They face a daunting, three-part test to even get in the door, says Thomas Noonan, CEO at Internet Security Systems Inc., a well-established security-management company. "They've got to be significantly cheaper, significantly better, and have to be able to be implemented with almost no disruption."

For Richard Milliman, director of patient access referral and verification services at Henry Ford Hospital in Detroit, the focus is on product quality and not on the vendor's age. "Our issue is more one of functionality than it is longevity in the industry," Milliman says. That's because he depends on two outsourcers -- Siemens AG, which handles the hospital's hardware, and Covansys, which handles its applications -- to guide him to the best products that will meet his needs and then provide any necessary support. "We expect the outsourcers to have the knowledge to keep the systems running," he says.

That worked out well for Praja Inc., a 5-year-old analytical-software vendor. Last year, Henry Ford was in need of a tool to let physicians track revenue and provide feedback on all types of patient and hospital information and for all its health-care centers in the Detroit area. Covansys happened to have graphical business-monitoring tools from Praja in its warehouse that were originally designed for the manufacturing industry. Covansys brought Praja to the hospital for a proof-of-concept pitch, but Milliman felt no need for a cost-benefit analysis.

"In this particular application, the return on investment was the ability to deliver information rather than any revenue enhancement," Milliman says. "Physicians are data-driven, and we haven't had the tools to deliver that to them." After a three-month implementation was completed in May, the application is running smoothly. Covansys and Praja provide the support together.

Kal Ramnarayan, VP and chief scientific officer at Structural Bioinformatics, Inc. Photo by Beth Herzhaft.

Smaller companies are more likely to be innovative, Structural Bioinformatics VP Ramnarayan says.
Kal Ramnarayan, VP and chief scientific officer at San Diego life-sciences company Structural Bioinformatics Inc., accepts no more than 20% of the meeting requests he gets from vendors, and his terms are tough. But what makes Ramnarayan unusual is that he wants to take a chance on a startup. He prefers working with smaller companies, which he considers more innovative and responsive. "The bigger companies can't change," he says.

That feeling led Ramnarayan to agree to meet with a 2-year-old grid-computing company, Avaki Corp. But it wasn't a get-to-know-you product demo. Ramnarayan expected the Avaki sales staff to walk in with a return-on-investment estimate and timetable tailored to Structural Bioinformatics and outlining all the hardware, software, and maintenance costs for several scenarios, depending on the number of users. "I told them specifically that we don't have time to evaluate software, and if they were going to sell us something, they had to know and meet my needs," Ramnarayan says.

Avaki also invested in an extensive, two-day demonstration that required it to migrate Structural Bioinformatics' applications into the Avaki environment to show the real benefit of grid computing, a process of tapping into unused computing power throughout a network. That's become the typical sales approach for the young vendor, which aims to perform 10 or more such demos a quarter. "There's a new ethic out there we have to respond to," Avaki CEO Dave Fish says. "We're not going to get a sale just on doing a demo. We actually have to install the software and do a valuation."

With Structural Bioinformatics, the questions didn't end with the technology and cost-benefit analysis. Avaki had to prove it was a solid business partner not likely to abandon its client should its circumstances change. Structural Bioinformatics did due diligence that was closer to an acquisition than a software deal. What's Avaki's business model? How strong is its management? What's the company's cash position? What would happen to support if it were bought? One selling point for Ramnarayan was that Avaki wasn't on a hypergrowth path. "They're not fluffing things up. They have intermediate revenues to keep them going and won't have to go back for money again," Ramnarayan says. "If they had said they were going to have 300 employees with so many technologies and an IPO, that would be a red flag."

Avaki passed the test, making Structural Bioinformatics an early addition to Avaki's roster of eight customers. Now the question for Avaki and others watching the tech economy's health and the pace of innovation, is: Can it land customer No. 9?

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